tiddman

To be fair I don't think Buffett accurately assessed BitCoin. He compared it to Western Union, just a way to transfer money from one person to another. However it is more than that, since you can buy BitCoins, and keep them, sort of how you can buy another currency and keep it, hence BitCoins do have a value relative to other currencies. The IRS has ruled that it is a property, not a currency, but that is still different than Buffett's definition. I think the currency is prone to theft and fraud and there is not a legal framework around it as there is with other currencies. What keeps a currency stable is the perception of its reliability and BitCoin has none. So in short I don't really understand Buffett's view of BitCoin, nor do I understand Andreessen's.

http://www.forbes.com/sites/timworstall/2013/04/30/with-all-of-apples-cash-why-is-it-issuing-bonds/

Well Berkshire's decentralized structure is fairly unique, certainly there are no other multi-hundred-billion dollar companies with a front office of 15 people. Berkshire relies heavily on the CEO's at each of the nearly 100 subsidiaries to run those businesses. I would say that most of those CEO's will change within the next 10 years and almost all of them over the next 20 years. It is possible that Berkshire could restructure itself to report through a more conventional reporting chain, but this would be quite a big shift and potential change in culture and focus.

Well take Berkshire's CORT for example. They buy furniture, lease it out for a while, and then eventually sell it (used). Any of us could enter the same business and do the same thing. I think the primary advantage you can get is scale and selection, i.e. enough of a critical mass of locations and inventory that you can appeal to a broad audience. However being smaller can also be an advantage since you don't have to move your stuff around as much and can focus on fewer markets. You must also be skilled at buying new furniture economically and selling used furniture at a good price. I don't think any of these things are particularly difficult but probably just come down to execution. Frankly I have always wondered what Munger's attraction to CORT was. He paid $386M for CORT in 2000, and profits were $15-25M in 2006-2008 (return on investment of 4-6%) and a loss in 2009, and earning $18M in 2010. To earn a 4.5% return on investment 10 years after the fact doesn't really sound too great. XTRA is similar, they buy and lease shipping containers. One thing I heard about this business is that the price of shipping containers fluctuates a lot, and if you are disciplined, you can expand your business at a time when the containers are cheap. But again this is not particularly different and is a business with low barriers to entry. Probably when you achieve a certain scale you have an advantage but it is not impenetrable IMHO.

More importantly, a majority of the CEO's will probably be new over the next decade. There is a lot of gray hair in the execs and most of them will retire or pass over the next 10 years. This I think is the largest succession risk at Berkshire, not just Buffett but the 50 or so execs that they'll need to replace departing CEO's. This could be an opportunity for a new generation of managers, Berkshire will need to be a place for the relatively young people to make their mark and build their wealth. Or it could be a way for the company to morph into something less than it is.

It's interesting to have a glimpse into the internals of Berkshire, but I don't think Buffett or Berkshrie can "hide" its publicly traded stock positions by squirreling them away in a trust. Berkshire has to report its consolidated holdings in a 13-F unless it gets a specific regulatory exception of some kind, i.e. this is an SEC requirement, not an insurance regulation requirement, which I don't think they can avoid based on the internal structure of the subsidiaries. Note that all of the positions the author mentions are in Berkshire's 13-F.

By the way, these numbers include primary residence, which accounts for approximately 75% of the totals, which makes this even more surprising. The average person of retirement age has about $50k of assets aside from their house? So if you work for 50 years that means saving $1000 per year (assuming no return). I guess taking inflation into account that doesn't seem quite as ridiculous but still. The US population between the ages of 45 and 64 is approximately 62 million (based on 2010 census). If these people have a net worth of $149k (average from the table I posted earlier) that is $9.24 trillion in overall net worth, 75% of which is in primary residences (very approximately), leaving 25% or $2.3 trillion in other worth. Total US market capitalization is around $15 trillion at the time of these numbers. So if 100% of non-primary-residence net worth was in the stock market, this would account for only about 15% of total market capitalization. Realistically most people probably only have a fraction of their savings in the stock market. So who owns the other 80-90% of the stock market?

I have been looking for numbers on the average net worth of people in various parts of the country and at various ages and have been surprised at what I've found. For example the Federal Reserve Survey of Consumer Finances in 2012 reported this: Median family net worth Age 45 to 54: $117,900 Age 55 to 64: $179,400 Age 65 to 74: $206,700 These numbers seem low to me. I wonder if this includes retirement accounts and home equity? For someone who works say for 30 years (age 22 to 52) to have a net worth of $118k seems low, that is the equivalent of saving less than $4k per year with 0% return. Comments?

Yes on one hand, people buy more aggressively in an up market and probably buy more stocks on margin. On the other hand, when stock values are high, people borrow against their stocks more and use those funds for other purposes. I know lots of people that use their taxable stock account as a sort of slush fund, and use margin to handle one-time expenses or other investments. The bearish view is that increases in stock values are being driven primarily by margin debt. I am not sure that's true but this probably contributes to it. I am not sure what percentage of the overall market is represented by retail investors with margin accounts, I would guess a fairly small portion.

Interesting to me that both Klarman and Watsa are cautious about market valuations, but Klarman upped his cash holdings while Watsa has bet strongly against the markets. Also Watsa bet against the markets well before valuations got high, I think he started to put on the hedges in 2010. I don't think Klarman was so bearish back then.

The 2 major differences between Fairfax and Berkshire are 1) Berkshire has substantial operating (i.e. non-investment, non-insurance) earnings, and 2) Berkshire has far less leverage. The operating earnings allow Berkshire to "coast" more and to provide it with basically an endless amount of investable funds without being entirely reliant on insurance, which by its nature is volatile. When either insurance or investments have a bad year, or both, Berkshire will most likely still show gains and have plenty of funds to invest. It also gets an immediate tax break when there is a large insurance loss since it always has lots of taxable income to offset. This blunts the impact of large one-time losses such as 9/11 or hurricane Katrina. Fairfax not only doesn't have this kind of cushion but is also more highly leveraged. This is less true today with a debt/equity of 1/3 but 10 years ago it was closer to 2/3. These things make Fairfax inherently more volatile. In a sense it is a two-legged stool and it has in its history had a few precarious periods including one where they almost got into serious trouble. I think those years influenced Watsa's thinking and led to his brilliantly executed bet against credit default swaps in 2008 and must also contribute to his very cautious/fearful stance today. My opinion is that I would rather have operating earnings than portfolio hedges but different strokes for different folks. Whenever you hear Buffett talk he is always the optimist, even in the dark days of the crisis, and every shareholder letter is upbeat and positive. I think this is because he has built an investment vehicle nearly free of risk and all he has to think about is his next deal or Dilly Bar. Fairfax's position is not so secure and needs constant attention and so from Watsa you hear a much more cautious message.

I think Munger said something simple but unhelpful like "they started to do things that we didn't like". Reading over Buffett's testimony, I suspect he knew more than he is letting on. He makes it sound like he just started to get a little suspicious and then dumped his shares. I think there is more to it. Check this out, from 1997: http://www.nytimes.com/1997/04/11/business/house-banking-chief-wants-freddie-mac-bond-inquiry.html

I seem to remember Buffett saying that the long term average ROE for American companies was something like 11%. I can't remember if that accounted for leverage or not. For example IBM's ROE is often in the 60-120 range, but they have been aggressively issuing debt and buying back stock, essentially a slow-motion LBO. Return on capital or return on enterprise value might be a better metric. I don't think that 14-15% is normal/sustainable, though wonder if there is some skew in those numbers. For example a lot of businesses have not been investing much over the past 5 years and earnings have only recently recovered. If they were waiting for earnings to increase before investing then equity might be artificially low until they start to invest. Also tax rates may be artificially low if corporations lost money in the past 5 years and have tax credits. BAC's ROE is something like 5%, and was running 15-20% in the 90's and early 2000's. I'd expect other large banks to be in the same area, because they have been required to retain capital but prohibited from investing it. So while the market average ROE might be high, there are plenty of examples of quality companies with low ROE.

Most mutual funds do not beat the market average over the long term, especially considering fees and expenses. There are different market averages and indexes but the S&P 500 is widely known. It is also easy to invest in the S&P 500 in amounts as little as a few $100 with very little expenses. For these reasons, investing your money in a stock index with little or no fees is actually a great way to outperform most mutual funds over the long term. If you contribute to this investment on a regular basis (say every month or quarter), you'll also smooth out the highs and lows. If you invest a fixed dollar amount, when the index is lower you'll buy more shares and when the index is higher you'll buy less. This is a great way to get started while you do research and try to pick funds or stocks. Picking funds or stocks that beat the market is actually really hard. Everyone you talk to will give you advice, and that advice is usually based on how that investment performed over the past 12-24 months, which often tells you absolutely nothing about what it will do over the time period that is important to you, namely the next 5-10 years. Good luck!

The Brookfield Asset Management 2013 letter has interesting comments about the property markets in China, which they have just started to get into. http://brookfield.com/_Global/42/documents/relatedlinks/6190.pdf

I think this is basically a normal market. Overall valued reasonably, some undervaluation in areas, and some overvaluation in others. Markets are a place for speculation as well. I remember trying to find stocks to buy in 2006 and 2007 and you couldn't find anything with a P/E of less than 20-25, even companies on the fringes of the economy like subprime lenders and money-losing startups were at huge valuations. Today's market just doesn't seem like that. Huge banks like BAC and WFC still appear cheap even with lots of unused capital.

I have been wondering how they would get out of the hedges, as the markets and economies continue to improve, and they continue to show ever-increasing losses. Time is not on the side of the short seller. I guess the answer is that they'll continue to sell stocks and an associated portion of the hedge, so the whole thing will unwind over time. It is really a shame to lose so many gains, from what is probably a once in a lifetime market recovery. Like others I completely don't understand the hedges. To call them a hedge is a bit of a misnomer, they are really a strong bet against the markets. If they had just wanted to be cautious, they could have held cash or decreased their overall leverage. Holding excess cash at a time of market declines offers an opportunity to profit. But they went a step further and put on the "hedges". Holding excess cash you miss out on gains if the market goes up, but holding hedges, you experience losses. There may be some overvaluation in parts of the markets and some financial institutions are probably to some extent propped up by the Fed policies. But the economy is also clearly improving, slowly, across the board, and perhaps more importantly the "go-go" attitude that led to the crisis is absent. I could see betting against a certain sector of the market or betting on volatility but betting against the broad markets at this juncture just seems nuts to me. The rationale and execution of betting against the credit default swaps and profiting from the downturn was absolutely brilliant, but I wonder if this success unduly affected their thinking about such events. That may have been a once in a lifetime event. It would be a shame for them to give back those gains over subsequent years hoping to catch lightning in a bottle twice.

I bought my first property (a condo) with $4500 down (5%) on an FHA loan. This seems like an amount that is achievable by almost anyone with a steady job. I didn't know it then but I was buying at the peak of the market and within 18 months it had fallen 10-15% in value. I was under water but really only by a few grand and I liked it well enough to stay for 3 years. I later rented it out and ended up owning it for almost 10 years, when it increased in value by 50% almost overnight and I sold it, and used the proceeds for a down payment for the house I live in now. With that purchase I had better timing and it increased in value by 50% within a few years even though I thought I was paying a lot. So my experience was turning $4500 into something more than 50x that without being particularly brilliant or adventurous but by just being willing to be patient. My lessons from this are 1) buy a house first and foremost to live in, and 2) plan on holding it for at least a full market cycle or two (10 years minimum), and 3) try to make sure that you aren't buying at a totally irrational peak. The same analysis can be used for rental properties, buying a rental property with 20% down is tricky because the interest expense is too high. But if you can get the LTV down to 50 or 60 somehow, and plan on sitting on it for at least 10 years, you really can't go wrong IMHO.

Bill Miller has started a new fund, with his son (Bill Miller IV) as an assistant manager. The fund is focused on income, it sounds like a multi-strategy fund looking at equities, bonds, REIT's, BDC's, MBS, mortgage instruments, etc. http://www.sec.gov/Archives/edgar/data/1474103/000119312513473423/d642829d485apos.htm It just started trading a couple of days ago so not much information is available, such as holdings. I am curious to know what he is buying. Fairholme has an income-focused fund as well (FOCIX), though the holdings are basically the debt securities of the equities that they hold in other funds, and about 2/3 cash.

In my area (northern Virginia) the monthly cost of owning vs. renting is pretty similar. If you buy a $500k house, the P&I might be around $2k plus $400 or so for escrows, and renting the same house would be the same $2400/mo. The interest and property tax are deductible so you might be a little ahead as an owner each month, the obvious problem being the $100k down payment you have to come up with. On a 30 year mortgage, the first payment is about 20-21% principal and the rest goes to interest and escrows, in this example that is about $525/mo you're essentially saving, though you won't realize it until you sell or refi. 5 years later this is 27%, 10 years later 34%, etc. as you go through the see-saw of the 30 year amortization schedule. Around year 18 more than half of your monthly payment starts to go to principal and at this point the loan is more than half paid off, so if you can just sit tight in the house, without any appreciation you can build up lots of equity. For many people we know this is basically their retirement plan, it is an expensive place to live and a lot of families don't have much savings besides their house equity, but if they just live in the house for 20-30 years they'll have something of value. Putting $100k down and then after 20 years having $300k of equity is equivalent to about 6% CAGR which is not great, but really not bad, it is higher than the current risk-free rate and coincidentally almost exactly what the S&P has returned in the past 10 years. However it is a complete no-brainer because all you have to do is buy a house that you can afford and live in it. Of course if you got unlucky and bought during the bubble, those principal payments are just going towards trying to get above water and the formula changes and your 20 year picture might be break-even or worse. Real estate in this area has appreciated at a long term average rate of about 4% for decades, and if you can hold for a market cycle or two then you can do really well. Using the same example as above, after 20 years the house would be worth over $1M so you'd have more like $800k in equity -- $100k from your down payment, $200k from principal paid down, and $500k from appreciation, and now the equivalent CAGR on your down payment is closer to 12%. This makes being a long-term renter a really dumb thing to do, but this is only true in markets where real estate appreciates, and if you didn't buy during a bubble.

A back of the napkin analysis, if you bought a $400k house in 1990, put 20% down ($80k) and financed the rest at 5%, after 24 years you should have paid about $500k in P&I, of which $217k went to principal, so you should have $217k + 80k = $297k in equity? Well compared to investing in Berkshire in 1990 almost every financial decision looks dumb so I wouldn't beat yourself up too much. My mother inherited some 40-year savings bonds sometime in the early 60's. An avid saver and very risk averse she hung onto the bonds until they expired and then for a few more years. So her $5000 or whatever of principal was safe and sound, plus her 4% or whatever non-compounding interest every year (about $8000 over the life of the bond). That same $5000 invested in the S&P in 1960 would be worth $171k today. Invested in KO it would be $769k. But of course investing it in thousands of other possible investments could have made it zero. So the bonds were either a terrible or great idea depending on how you look at it.

Borrowing against your house to invest in stocks is generally a really bad idea. It puts something that you really need (your house) at risk. If your house is already paid off you have a pretty high degree of financial stability that you'd be giving up. Doing this and picking one stock, any one stock, is especially risky, if the stock underperforms, tanks, or goes to zero, you could lose your house. You might compare getting a mortgage, using the proceeds for investment, and making payments on the mortgage to simply investing the same monthly amount into the same investment. That is, rather than taking out a $200k loan on your house, investing it, and paying $1400k/mo for 15 years, instead just invest $1400k/mo. The 2nd approach probably carries less risk and dollar cost averaging into a stock index has been suggested by some old guy in Omaha as a good no-brainer way of investing.

Back in 2006 I approached a shell company to see about a reverse-merger-IPO and the numbers that were bandied about were in the $200-400k range. Some of this could have been in the form of stock in the new company. Maintaining a public company is expensive, moreso after Sarbanes-Oxley. Just to Google a quick data point: http://www.icba.org/files/ICBASites/PDFs/cl120610.pdf This is only a single data point and geared towards community banks (which have other regulations/compliance) but I think you can expect well into six figures for the initial and ongoing expense. It might be possible to defray some of this if you are an avid DIY'er or have a lawyer or accountant in the family or something but I would definitely do some homework on this. If the goal is to have some kind of family trust with multiple members and the ability to buy and sell shares and that kind of thing, this can all be done privately, essentially a private equity fund. Usually the regulations for this as much decreased if everyone involved is an accredited investor, if not then the regulations can get pretty onerous.

Most of the basics like filing deadlines are available on sec.gov for example filing deadlines for 10-Q: http://www.sec.gov/answers/form10q.htm Difference between 13D and 13G: http://www.sec.gov/divisions/corpfin/guidance/reg13d-interp.htm If you need to know something more esoteric, or there is more at stake than your curiosity, then you should either contact the SEC or hire a securities lawyer.

An important aspect of this ratio that I think requires analysis is to what extent private vs. public companies contribute to GDP? The ratio is public market cap to GDP. If a large company went private, or went public, that would affect the numerator (market cap) but not the denominator (GDP). If there was a long period of excessive IPO's (dot com) or lack of IPO's (recession) that would skew this ratio, but not because of overall market valuation, but instead due a change in the mix of public vs. private companies.